The 6,000 interest charge hidden in new student loans that will be handed to graduates the day they

leave university

Rate is 3 percentage points above inflation Typical student will be saddled with 49,404 debt

By Lauren Thompson Last updated at 1:40 AM on 9th July 2011

Exorbitant interest rates on new university loans mean that average middle-class students will owe 6,000 more on the day they graduate than they originally borrowed to fund their three-year course. From the moment they receive the first tranche of their loan, they will begin racking up interest at a crippling rate which is 3 percentage points above inflation and higher than at most high street banks. A Daily Mail investigation found that typical students will have to borrow 43,500 to fund their higher education over a three-year course 9,000 a year for tuition and 5,500 a year for living costs.

Looking forward: Students of Liverpool University waiting to receive their degrees can also look forward to receiving a statement on their student loans (file picture)

Before they even start work, that debt would have grown to 49,404. And interest charges would rack up year after year, with many saddled with a massive debt they can never hope to pay off, even if they have a relatively well-paid job. A Money Mail investigation into this student debt-trap has also revealed:

The Government may pocket more than 150million in interest in the first year of payback; Low-earning graduates will have to pay 41p in every pound they earn in loan repayments and tax; Higher earners could be forced to pay back double what they borrowed; Graduates who dont get a full-time job for several years will be 25,000 better off

Ian Mulheirn, of the Social Market Foundation think-tank, said: The headline figure of 9,000 a year for tuition fees is deeply misleading. With punishing interest rates this high, and kicking in so early, it is more like theyve increased from 3,000 to 12,000. From September 2012 tuition fees will rise from 3,290 to 9,000 a year at most universities. All students will qualify for a loan or a grant to cover these fees and their living expenses. How much they get depends on their household income. While they are at university the interest rate is inflation, as measured by the retail prices index (RPI), plus 3 percentage points. It remains at this rate until they graduate. IMPACT ON HOMEBUYERS Buying a house will be much harder for graduates saddled with huge amounts of student debt. The average mortgage for a first-time buyer is currently 103,000 double what many people will already owe on their student loan. The Government says a student loan is very unlikely to impact materially on getting a mortgage. But mortgage brokers point out that when applying for a mortgage, all lenders will ask about your debts including a student loan. Because the debt is likely to last for 30 years, an even bigger problem may occur if the graduate starts a family, thereby further reducing their financial ability to raise a mortgage. Currently RPI is 5.2 per cent, so the loan interest rate would be 8.2 per cent 1.5 per cent higher than on a personal loan from Marks & Spencer Money. After they leave university the interest rate on the loan will depend on earnings. Repayment does not begin until their salary tops 21,000. However, even below this salary interest continues to rack up at the rate of RPI. On earnings between 21,000 and 41,000, the interest rate gradually rises to 3 percentage points above RPI. If the loan is not repaid within 30 years, any remaining debt is written off. For our calculations, which have been compiled by financial data analysts Moneyfacts, we have assumed inflation is 3.5 per cent and that the graduates leave university with a debt of 43,500. One graduate starts work on 21,000 and receives a 5 per cent pay rise every year. Over 30 years they would pay back 68,869 of which 25,369 is interest. At the age of 50, they would still be paying 5,889 a year in student loan repayments. When the loan was finally written off the graduate would still owe 123,285. Our second example assumes the same salary but the graduate goes travelling for five years and starts earning 21,000 only on returning to Britain. They would pay back 42,954 over 30 years, 25,915 less than someone who starts earning 21,000 immediately after graduating. A massive 189,027 would be written off.

Our third is a high-flier who starts on 30,000 and earns 100,000 by the age of 50. This graduate would pay back 89,100 which means the 45,600 interest they would have paid is greater than the sum they originally borrowed. To make things worse, graduates will not be able to overpay their loan or pay it off early, although the Government may change its mind on this. It means that for every 1 they earn, graduates who are basic rate taxpayers will lose 41p in income tax, National Insurance and student loan repayments. Higher rate taxpayers would lose 52p of every 1. The extra 3 percentage points interest means that based on an intake of 400,000 students the Government would rake in more than 150million interest in the first year alone. The increase in tuition fees and new rates for living cost loans are expected to be confirmed later this year.